DeFi Concepts You Need to Know for 2026 (Part 2)

Are you exploring decentralized finance (DeFi) and overwhelmed with all the new concepts and jargon? Well we’ve written this plain-english guide to take you from the most basic concepts through to some of the most advanced ideas as quickly as possible. Let’s dive in:

Vaults

Vaults have recently become extremely popular products with TVLs growing from 100s of millions to billions in just the last 12 months alone. In essence, they are a set of smart contracts (and sometimes off chain processes) that aim to generate yield for users.

How do they accomplish this? The curators of these vaults, the people that ‘run’ the vault, usually take advantage of one of the following primitives, or markets, on chain:

• DEX LP positions: where LPs earn fees for providing liquidity to enable swaps to occur

• Lending markets: where lenders can earn fees from borrowers

• Pendle markets: where yield is tokenized into principal and yield components (PT and YT), allowing users to fix yields or trade yield independently

• Perps funding / basis: where delta-neutral strategies may earn funding or basis by hedging spot exposure with perpetual futures, noting that funding can be positive or negative depending on market conditions

• Options: where options sellers collect premiums from purchasers

There are three types or categories of vaults:

• Onchain native vaults: these take advantage of products and tokens that only exist onchain

• Off chain vaults: these deploy funds to an offchain provider who may run private strategies in private markets, like institutional lending

• Hybrid: vaults that take advantage of both on and off chain opportunities

In a lot of cases, these vaults can be easily replicated by looking at the underlying assets that the vaults are deploying into. But the value of vaults lies in the time and effort saved in curating, indexing, rebalancing, and monitoring positions on an ongoing basis.

How do vaults work under the hood? Well there’s lots of jargon at the technical level here, but what you mostly need to understand is the following:

• These vaults accept a token (usually a stablecoin or yield-bearing asset)

• Depositors receive vault shares that represent a claim on the underlying assets

• Strategy or allocator logic within the vault deploys funds into underlying venues or protocols

• Curators may have permissions to adjust parameters, rebalance allocations, or whitelist integrations, depending on the vault design

• Returns accrue to the vault and are reflected in the value of the vault shares, net of fees

There are hidden risks that aren’t always visible at the surface level. Vault users are exposed not just to the performance of the underlying strategy, but also to smart contract risk, integration risk with external protocols, and governance or admin risk depending on who controls upgrades, parameters, or emergency functions. These risks are amplified in off-chain or hybrid vaults, where users must additionally trust custodians and third-party managers, and where positions cannot be independently audited or verified onchain in a trustless manner.

Oracles

Oracles are one of the most important, but less discussed, primitives in DeFi. They mainly serve to provide price information from outside the chain to be used in applications onchain. Blockchains only store the events that happen on them, so information such as prices aren’t included in these. For example, Alice sends Bob 5 ETH, but the price of ETH isn’t recorded on the chain. Also a lot of asset price discovery happens on closed venues (like CEXs) so oracles solve a major problem by ensuring these prices reach applications on chain. 

In short, oracles do this by creating a smart contract which stores these values onchain and can be read by other smart contracts or products, like lending markets. There is typically a consensus and penalty mechanism to ensure that people don’t publish the wrong information.

Before oracles like Chainlink and Pyth were launched, early DeFi products would rely on a centralised party publishing a price feed for a specific asset, which can be risky. Alternatively, some products would use the quoted price on a DEX, as this uses purely on chain information (see part 1 for more information).

They function as a means to enable a blockchain-native price feed for an asset, so reliance on external third parties running a single API for a particular price aren’t needed. As many of the core products in DeFi rely on an accurate price feed to ensure healthy debt and margin levels, oracles play a critical role in the ecosystem.

Perpetual Futures (Perps)

Perpetual futures, commonly known as perps, are financial instruments that allow someone to gain exposure to the price of an asset without owning the underlying asset. They are similar to traditional futures contracts but they don’t have an expiry in the traditional sense, hence the name “perpetual”. Fun fact: perps were popularised in crypto by BitMEX, with the first widely adopted perpetual swap launched in 2016 and announced by co-founder Arthur Hayes.

Like normal futures, there is a counterparty on each side of the trade, with the exchange managing margin requirements, collateral, and liquidation mechanics to keep the system solvent. Because perpetuals never settle at expiry, exchanges use a funding rate mechanism to keep the perp price anchored to the underlying spot price. At regular intervals, traders on one side of the market pay traders on the other: when the perp trades above spot, longs typically pay shorts, and when it trades below spot, shorts typically pay longs.

This creates an economic incentive for traders to take the opposing side and helps pull the perp price back toward spot. One of the main draw cards of perps is the ability to take leveraged long or short exposure in a capital-efficient way, making them especially useful for speculation, hedging, and market making. In volatile markets, this leverage amplifies both gains and losses, which is why perps are particularly attractive to active traders.

Delta-neutral perp strategies have also emerged as a way to generate yield by hedging spot exposure with short derivatives and capturing funding or basis when market conditions allow. While these strategies remove directional price risk, they are not risk-free. Funding rates can flip, basis can move against the position, and traders are still exposed to execution, liquidation, and exchange risk. Variants of this delta-neutral hedging approach underpin products such as Ethena’s yield-bearing USDe and sUSDe, where yield is generated through systematic hedging rather than simple price appreciation.

Looping

Once you’ve understood the basics of how lending markets and yield-bearing stablecoins (or vaults in general) work in DeFi, you’ll quickly realise that the main incentive and activity is to repeat this cycle multiple times to extract the highest returns. This is also known as looping and is critical to understand if you’re trying to build sizable TVL in your product.

Loopers (those that intentionally exploit this strategy) take advantage of the gap between borrow rates and the base yield for a vault / yield bearing stablecoin, to then loop multiple times. This spread is the key focus area for loopers as the larger the spread, and the lower volatility of the underlying asset, the easier it will be for them to loop multiple times. For example, looping up to 5 times for a stablecoin-based strategy is more feasible than with a more volatile asset like ETH.

In reality, this can turn $10m of base TVL into $50m+, as looping 5 times can be easily achieved. This is what Apollo and Gauntlet have been exploring with their ACRED token and the looping infrastructure around it. The benefits of this is that you can effectively get leverage on your initial deposit whilst keeping yields sustainable (depending on the underlying strategy).

We intend on releasing a looping calculator soon to allow you to work out how to monitor and track the risk in looping positions.

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If you’ve made it this far, thank you for your time. We’ll be posting part 3 soon. In the meantime feel free to get in contact if you have any questions about applying DeFi, RWAs and tokenization to your business.